Tax liability on businesses

Tax liability can be seen in the widest sense as the percentage of taxes levied on the tax base, and thus the issue of tax liability on businesses is closely related to issues of taxation policy and the impact of taxation.

The issues of income tax for individuals (personal income tax) and legal entities (corporation tax) are regulated by Law No. 595/2003 Coll. On Income Tax as Amended (hereinafter referred to as the “Income Tax Act”). This law also establishes the conditions for the payment of tax on profits (dividends) and tax licenses.

Personal income tax

Personal income tax is a universal tax to which all taxable income of individuals is subject.

A payer of personal income tax is defined as an individual who earns income which is subject to income tax; the Income Tax Act also distinguishes between two categories of taxpayer:

1. taxpayers with unlimited liability for income tax

This is defined as an individual who has permanent residence in Slovakia or who is resident in Slovakia for at least 183 days per calendar year.

2. taxpayers with limited liability for income tax

This is defined as an individual who does not have permanent residence in Slovakia or who is resident in Slovakia for less than 183 days per calendar year.

The extent of the liability for personal income tax differs depending on whether the income of a taxpayer with limited liability is derived from within the Slovak Republic alone or whether the income of a taxpayer with unlimited liability is derived from within the Slovak Republic or from abroad.

The rate of personal income tax is 19% from the tax base or 25% when the tax base is greater than €35,022.31.

The issue of the potential double taxation of income in different countries is addressed through a series of international double tax treaties which the Slovak Republic has concluded with individual states. These treaties take precedence over the law and specify which of the contracting states has the right to tax specific incomes. In order to avoid double taxation, one of two methods applies – the tax credit method or the income elimination method. Slovakia currently has 66 such contracts with all developed states, including Ukraine, Russia and China.

Income liable to personal income tax is divided into four categories:

• income derived from dependent activities,
• income derived from business, other types of self-employment or from rent,
• income derived from capital assets,
• other forms of income.

The most common form of business for individuals is self-employed businesses (sole trader businesses), but the calculation of tax liability for such activities is the same as that for individuals who perform private professions.

The taxable income (or tax base) of an individual is determined as the total of two categories of personal income: active income and passive income. In terms of taxation, the difference between these two categories is that it is possible to deduct non-taxable elements of the tax base from the active income and therefore any tax losses can be deducted from this tax base alone.

Tax relief

The tax base (which is to say the part of the tax base which is obtained from active income) can be reduced by tax relief deducted from the taxpayer’s tax base. According to the relevant taxation legislation, this tax relief is set at 19.2 times the official national subsistence level (in 2017 values, a total of €3803.33) if the taxpayer has an total tax base less than or equal to an amount 100 times the official national subsistence level (in 2017 values, a total of €19,809). If the taxpayer has a tax base greater than or equal to €35,022.32, no tax relief is applicable.

Tax deductions

According to the Income Tax Act, entrepreneurs can use the expenses which are incurred in secure and maintain income to claim tax deductions from their tax base.

Self-employed individuals can choose from a number of different options for claiming such deductions depending on which possibility is most beneficial for them:

• So-called lump sum expenditure equivalent to 60% of total revenue (i.e. from business activities and other forms of self-employment) up to a maximum of €20,000 per year,
• actual demonstrable expenditure on the basis of tax records,
• actual demonstrable expenditure on the basis of simple or double-entry bookkeeping.

Corporation tax

Legal entities are liable for corporation tax and are divided into two categories of taxpayers:

• taxpayers with unlimited liability for corporation tax.

This is defined as a legal entity which has its registered office or management office located in the Slovak Republic,

• taxpayers with limited liability for corporation tax

This is defined as legal entities which are not subject to unlimited liability for corporation tax.

The income (or revenue) of the taxpayer from the taxpayer’s activities and the handling of the taxpayer’s property is liable for corporation tax, with the exception of specially defined subjects which are not established or set up for business purposes.

The extent of the liability for corporate tax differs depending on whether the income (or revenue) of a taxpayer with limited liability is derived from sources within the Slovak Republic alone or whether the income (or revenue) of a taxpayer with unlimited liability is derived from sources within the Slovak Republic or from abroad.

The taxable base is understood as the difference by which the taxable income exceeds the tax deductions on the basis of the rules laid out in the Income Tax Act with respect to the material and time-based context of the taxable income and deductions in the relevant tax period.

The corporate tax rate for tax bases reduced by tax losses is 21%. The withholding tax rate is 19%. Since 1st March 2014, a withholding tax rate of 35% applies if the taxable income is paid or credited to a taxpayer of a non-contracted state.

Expense deductions

Expenses for tax purposes are the expenses (or costs) which are demonstrably incurred by the taxpayer in the course of achieving, securing and maintaining taxable income and which are recognized as such in the entity’s accounts. Legal entities are required to record valid expenditure on the basis of double-entry bookkeeping.

Tax licence

Tax licences are a form of minimum corporation tax which are applicable to every legal entity for each taxable period in which it has declared:

• a tax liability lower than the value of the tax licence,
• zero tax liability,
• tax loss.

The amount of the tax licence is as follows:

1. a tax licence of €480 shall be paid by taxable entities which were not, as of the final date of the taxable period, payers of value added tax and which had an annual turnover of less than €500,000,
2. a tax licence of €960 shall be paid by taxable entities which were, as of the final date of the taxable period, payers of value added tax and which had an annual turnover of less than €500,000,
3. a tax licence of €2880 shall be paid by taxable entities which, as of the final date of the taxable period, had an annual turnover exceeding €500,000,

Tax licences issued in 2018 will be valid for the 2017 tax year.

Dividend tax (share profits)

Dividend earnings from shares for legal entities were exempt from corporation tax in the period from 1st January 2004 to 31st December 2016, but from 2011 onwards dividends were subject to a levy for health insurance contributions to a total of 14% of the assessed value.

Dividend tax is levied on individuals resident in the Slovak Republic at a rate of 7%, applicable both on dividends earned within the Slovak Republic and in foreign states. Profits on shares earned by corporations after any tax payable among legal entities within the SR are not subject to this tax.

The tax on dividends paid in the Slovak Republic will also potentially be paid by individuals (and also legal entities) who are not residents of the Slovak Republic for tax purposes. Depending on the state in which the taxpayer is resident for tax purposes, the applicable international treaty to avoid double taxation would likely apply. Under the relevant provisions of the majority of the existing treaties, the dividend tax in Slovakia would not be payable, but would instead be taxed in the relevant tax resident taxpayer’s country of residence according to the rules of the particular state. If the dividends are exempt from tax in that state, then a taxpayer in this situation would not pay any dividend tax whatsoever. Legal entities which are tax residents of the Slovak Republic will pay dividend tax even if they receive a dividend from a non-contracting state, and the 35% withholding tax rate would apply.

The tax liabilities for businesses in the Slovak Republic are outlined in the following table, which compares the tax and levy obligations of a legal entity and a self-employed individual, the most common form of business in Slovakia.